Financial Management Exam: Activity Based Costing, Budgeting, CAPM, Sources of Finance, Stakeholder Approach

This exam covers various topics related to financial management such as activity based costing, budgeting, capital asset pricing model, sources of finance for SMEs, and stakeholder approach in corporate strategy. It discusses the features of activity based costing, key decisions taken under break even and cost profit volume, calculating capital asset pricing, evaluating CAPM, and the limitations of traditional budgeting. It also outlines the sources of finance for SMEs and the requirement of stakeholder approach while appraising corporate strategy.

ONLINE EXAM-Financial
Management

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................3
Features of activity based costing and reason for its development.............................................3
Key decision taken under break even and cost profit volume....................................................3
QUESTION 2...................................................................................................................................4
Calculating capital asset pricing..................................................................................................4
Calculating weighted average cost of capital..............................................................................4
Evaluating CAPM and whether it is good way for determining the cost of equity....................4
QUESTION 3...................................................................................................................................5
a. Critically discussing how budgeting may be used as a tool to aid control and performance..5
Limitation of traditional budgeting and features of beyond budgeting.......................................5
QUESTION 4...................................................................................................................................6
Outlining the sources of finance for SME other than listing......................................................6
QUESTION 5...................................................................................................................................6
Discussing the requirement of stakeholder approach and related factors while appraising
corporate strategy........................................................................................................................6
REFERENCES................................................................................................................................8

QUESTION 1
a. Features of activity based costing and reason for its development
Activity based costing is being referred to as the tool which assist company in dividing
the cost and attributing to the product and services. This involves focusing on the identification
of activities for a particular job and different activities are grouped together and relates to single
cost driver (Liu, 2021). The features of ABC involves the following-
 The total cost is being divided in two different types that is fixed and variable cost.
 In addition to this another key feature of ABC is the there is proper distinction being
made within the cost behaviour pattern.
 Moreover, the cost driver needs to be identified in order to trace the overhead to the
product directly.
With the above analysis it is clear that the use of ABC is very important for the
companies in managing cost. The reason for the development of the ABC is that this method is
more accurate and assists in better costing of product and services. This costing method
highlights the most costly and the non- value adding activities more visible and this assist
manager in improving those areas.
b. Key decision taken under break even and cost profit volume
The break even or the cost profit volume is being defined as the level of production
wherein the company is at no profit no loss situation. This is necessary for the company to
analyse and take proper decision relating to the production level. This BEP or cost profit volume
in taking major decision that is the sales quantity where the company can be in no profit and no
loss situation.
On the other hand, there is some of the limitation relating to break- even point. The major
limitation of the break even or cost profit volume is that it assumed the fixed cost is constant
whether be it short run or long run production (Villasanti, Giraldo and Passino, 2018). Another
limitation of using the BEP or cost profit volume is that this method assumes that average
variable cost is constant per unit for at least quantity of sales.

QUESTION 2
a. Calculating capital asset pricing
Capital assets pricing model
Particulars Formula Figures
Rf (Risk free rate) 7%
Beta 0.85
Rm (market return) 15%
CAPM Rf + Beta (Rm - Rf) 13.8%
b. Calculating weighted average cost of capital
Weighted average cost of capital= [(E/V) x Re] + [(D/V) x Rd x (1 - Tc)],
V= E+P+B
V= 500+300+500= 1300
[(500/1300)*13.8%) + (300/ 1300 * 8%)] + [(500/ 1300) * 5% * (1- 17%)]
=0.0875%
where:
E = equity market value
Re = equity cost
D = debt market value
V = the sum of the equity and debt market values
Rd = debt cost
Tc = the current tax rate for corporations
c. Evaluating CAPM and whether it is good way for determining the cost of equity
The capital asset pricing method is being defined as the relation between the expected
return and the risk of the investment portfolio. It outlines the expected return which the security
provides and this is based on beta of the security. Yes, the CAPM is a good way of determining
the cost of equity as it provides a useful measure for the investor in determining the return which
they deserve over the investment.

QUESTION 3
a. Critically discussing how budgeting may be used as a tool to aid control and performance
Budgeting may be defined as a quantitative tool which presents estimated revenue and
expenses pertaining to a specific time frame. In the context of business unit, budgeting may be
served as the most effectual tool which provides deeper insight about the extent to which money
need to be spent. In addition to this, by using budgets business unit can assess deviations which
take place in company’s performance (Lukač and et.al., 2019). In other words, by comparing
current performance in against to the standards firm can easily determine the extent which
specific department failed to meet benchmarks. Referring causes of deviations business unit can
take corrective measures performance control and enhancement. Hence, by considering all such
aspects it can be stated that budgeting plays a vital role in performance evaluation and control to
the significant level.
The benefit of using budgeting is that this improves effective resource allocation and as a
result of this the working of the business will be improved. Moreover, another benefit is that this
tool also assists in effective reallocation of work in better and effective manner. on the other
hand, the drawback of using the budgeting as a planning tool is that the budget cannot be always
correct as no person can predict the future correctly.
b. Limitation of traditional budgeting and features of beyond budgeting
The traditional budget is a type of budget which is being prepared by keeping in mind the
past data and records. This is the type of budgeting which involves the past data and because of
this it is stated as the traditional form of budgeting. The limitation of using the traditional
budgeting is as follows-
 The major limitation being faced by using the traditional budgeting is that there are
chances of high human error. This is because of the reason that the budget is being
prepared by undertaking the past data. There can be human error and this can lead to
issues.
 In addition to this, another limitation is that the prediction can be wrong as the working is
based on future working (Astiti, Warmana and Hidayah, 2019). This is pertaining to the

fact that future cannot be predicted and as a result of this the prediction can be prove
wrong.
Other than, this there is also a concept of beyond budgeting which states that traditional
budgeting must be abolished in order to improve the management control of the company. The
use of beyond budgeting is very important in order to make the working better and effective
(Ramírez-Urquidy, Aguilar-Barceló and Portal-Boza, 2018). Some of the features of using
beyond budgeting are as follows-
 The key feature is that this method is much faster and adaptive in comparison to the
process of traditional budgeting.
 Along with this, another key feature is that the process is decentralised and this makes the
budgeting much easier and effective.
QUESTION 4
Outlining the sources of finance for SME other than listing
Without the use of finance no company can work in better and effective manner. The
reason pertaining to the fact is that without the money no activity can be undertaken within the
business. Thus there are many different types of sources through which finance can be generated.
Other then listing the sources of finance being available for both the companies is as follows-
 Loan- this is a type of finance wherein the company can borrow the money from any
bank or financial service provider. In this present source of finance the person has to give
interest against the money borrowed or some collateral against the loan taken.
 Debenture- this is another source of finance through which money can be borrowed in
order to fulfil the need of the business. In this source of finance, the money is being
borrowed by issuing the debenture to the public. In this source of finance, the ownership
is not being provided to the person getting debenture.
 Venture capital- in addition to this, it is another source of finance wherein both the
companies can arrange for the money. This is a source of private equity financing which
provides the fund for the start-up (Gherasim and Ionescu, 2019). Both the companies can
also take or borrow money from the venture capital and fulfil their need and requirement
of the business.

QUESTION 5
Discussing the requirement of stakeholder approach and related factors while appraising
corporate strategy
When the business is operating then there are many different types of people being
involved. Hence it is very important for the business that they keep all the people involved
within the business happy and satisfied. The reason underlying this fact is that when the business
will not be providing satisfaction to various stakeholders then this will be affecting their business
and its development. The stakeholders are the people who are interested in better working of the
company. These are the people who always think for the development and growth of business.
Hence, it is the responsibility of business that they undertake the use of stakeholder approach in
order to keep the stakeholder happy and satisfied (Li and et.al., 2020). Hence when the
stakeholder will be happy then this will result in the effective attainment of the objectives of the
business. In addition to this it is also necessary for the business to keep other factors as well in
mind while working. This is because of the reason that when the working of the business will be
good then this will be improving the working efficiency of the business. Thus, for implementing
any of the strategy or any other decision it is necessary that stakeholders are being taken care off
while making strategies.

REFERENCES
Books and Journals
Astiti, N. P. Y., Warmana, G. O. and Hidayah, M., 2019. Financial literation and investment
decision behavior of entrepreneurs in Bali. International Journal of Applied Business
and International Management (IJABIM). 4(3). pp.64-68.
Gherasim, Z. and Ionescu, L., 2019. The financial accountability of e-government: the
information transparency of decision-making processes in public organizations. Annals
of Spiru Haret University. Economic Seriesˮ. 3. pp.23-32.
Li, W., and et.al., 2020. Data mining optimization model for financial management information
system based on improved genetic algorithm. Information Systems and e-Business
Management. 18(4). pp.747-765.
Liu, B., 2021, April. Research on Enterprise Financial Management Supervision Mode Based on
Data Mining. In Journal of Physics: Conference Series (Vol. 1881, No. 4, p. 042074).
IOP Publishing.
Lukač, J., and et.al., 2019. Use of Statistical Methods as an Educational Tool in the Financial
Management of Enterprises in the Implementation of International Financial Reporting
Standards. TEM Journal. 8(3). p.819.
Ramírez-Urquidy, M., Aguilar-Barceló, J. G. and Portal-Boza, M., 2018. The Impact of
Economic and Financial Management Practices on the Performance of Mexican Micro-
Enterprises: A Multivariate Analysis. Revista Brasileira de Gestão de Negócios. 20.
pp.319-337.
Villasanti, H. G., Giraldo, L. F. and Passino, K. M., 2018. Feedback control engineering for
cooperative community development: Tools for financial management advice for low-
income individuals. IEEE Control Systems Magazine. 38(3). pp.87-101.